The Hungarian government’s arguments against Ukraine’s sanctions on Russian oil company Lukoil are falling apart.
Hungary accused Ukraine of “blackmail” and endangering its energy security after Ukrainian sanctions blocked Lukoil, Russia’s second-largest oil company, from transiting crude oil through the Druzhba pipeline in June.
Hungary and Slovakia were exempt from the EU’s Russian oil sanctions in 2022, which made up 65-70% of supplies to Hungarian oil refiner Mol and its Slovakian subsidiary Slovnaft in May 2024.
But Hungary’s panic-imbued rhetoric has fallen flat as country fails to find supporters. Even Russia, Hungary’s ally, has remained quiet despite a phone call between Hungarian Foreign Minister Peter Szijjarto and his Russian counterpart Sergey Lavrov to discuss options.
The European Commission concluded there was no “immediate threat” to Hungary and Slovakia in a preliminary analysis after Budapest reached out to Brussels for help. Ukraine battered away the accusations, noting that Russian oil transit through Druzbha did not drop last month. Lukoil is instead selling its crude to non-sanctioned Russian companies like Rosneft and Tatneft.
Another nail in the coffin was Hungary’s Mol calling for calm and said that a shortage is unlikely during a conference on Aug. 5. CEO Zsolt Hernadi told the audience that the company has enough reserves for 90 days and pointed towards alternative routes for Russian crude.
Mol did not reply to the Kyiv Independent’s request for comment.
The outrage is more likely related to Hungarian Prime Minister Viktor Orban’s relationship with Moscow, energy experts told the Kyiv Independent. Orban and Slovakian Prime Minister Robert Fico previously held up fiscal and military support for Ukraine, while Orban angered Kyiv and Brussels last month by meeting with Russian President Vladimir Putin on a “peace mission.”
“The scandal is artificially created by Orban and Fico. They are executing an order from Moscow,” said Sergiy Makogon, former head of Ukraine’s gas transport operator.
Hungary’s dependence on Russian oil, nuclear, and hydrocarbons, used for fuel and plastic production, leaves it vulnerable to blackmail, said Wojciech Jakobik, a Warsaw-based energy analyst. Russia could paralyze Hungary’s economy if it acts against Moscow’s interest, he said.
Hungary and Slovakia threaten retaliation unless Ukraine lifts the sanctions, including suspending diesel and electricity imports. The threats hold little weight in Ukraine, which would likely purchase diesel to fuel its military from other countries like Poland, said Makogon.
Likewise, he said both countries could face repercussions for stopping electricity imports. Ukraine doesn’t buy Hungarian electricity, but electricity from other countries that is sold on the Hungarian market. Foreign companies could sue Hungary for blocking electricity to Ukraine, according to Makogon.
Hungary’s Foreign Ministry did not reply to the Kyiv Independent’s request for comment.
Fuelling Russia’s war
Kyiv has not publicly explained why the expanded sanctions just target Lukoil and not other Russian oil companies. The President’s Office did not reply to the Kyiv Independent’s request for comment.
However, the ban could set the precedent to block the route to more Russian companies, said Jakobik. Kyiv has not announced plans for further action.
Russia currently transits over 1 million metric tons of crude oil through the Druzhba pipeline monthly, lining the pockets of Russian companies. Lukoil sends 2 million metric tons annually to Mol, making up nearly a third of Hungary’s supplies and 45% of Slovakia’s, according to Szijjarto.
Lukoil did not reply to the Kyiv Independent’s request for comment.
Targeting Russia’s second-largest oil company will limit its profits and the taxes it pays to the Kremlin, Jakobik said. The company earned a total of $13 billion in profits last year. In total, Russia’s oil sector earned $180 billion from exports, fuelling Moscow’s war machine.
Brussels urged both parties to find alternatives, particularly Croatia’s underutilized Adria pipeline which has the capacity for 14.3 million metric tons annually. But Budapest complained that Adria’s transit fees are too high.
Nevertheless, Hernadi said that Croatia is a viable option, although he also insisted on keeping Druzbha open, Reuters reported. Mol and Slovnaft plan to increase oil imports via Croatia from 30% this year to at least 60% next year, former Slovakian Economy Minister Karel Hirman told the Kyiv Independent.
“Sanctions against Lukoil are not a drama for the Mol group,” Hirman said, adding that Lukoil only makes up 20-25% of Mol’s oil supplies.
The Lukoil sanctions could be Kyiv flexing its muscles to its reluctant and hostile European neighbors, said Oleksandr Kharchenko, managing director of the Kyiv-based Energy Industry Research Center. Kyiv has drone-bombed oil facilities across Russia, including Lukoil’s, in response to Moscow circumventing Western fuel sanctions.
“We have to defend our national interests. We have to show that Ukraine also can be strong in some direction. Hungary depends on Ukraine as Ukraine depends on Hungary,” he said.
Lack of political will
Hungary, Slovakia, and Czechia were exempt from the EU’s Russian fuel embargo in 2022 after Viktor Orban argued that the landlocked countries needed more time and money to adapt their infrastructure to non-Russian crude.
Over two years into the war and sanctions, Hungary and Slovakia have not weaned themselves off Russia, unlike Czechia. On top of Orban’s close relationship with Moscow, energy experts accuse Budapest of prioritizing cheap Russian oil over genuine energy security.
“You can see a long-term policy of pro-Russia energy and climate policy in Hungary. You can see similarities in Slovakia,” said Jakobik.
“It could be the easiest way to get a cheap resource but you pay for this with insecurity of supply, which is happening right now.”
The Russian oil sector has taken a hit in recent months. Exports dropped to 620,000 barrels, 30,000 less than last year’s average, and drilling fell by 2.3% y-o-y in the first half of 2024, according to Bloomberg.
While not related to the sanctions on Lukoil, the decline is likely due to decreased production in line with OPEC+ commitments, increased refining which decreases the amount to be exported, and broken infrastructure, according to Jakobik.
The Druzhba pipeline is a precarious option for Budapest, explained Makogon. Oil transit through Ukraine relies on electricity which is vulnerable to Russian strikes. If a Russian attack hits an energy facility, then the oil transit could be cut off, he explained.
Changing to a more reliable source, like Croatia or Poland’s Gdansk ports, is simply down to political will, Jakobik believes. It is safer to move to non-Russian oil imports, even if the process is more expensive, he added.
Feud in the Adriatic
Mol and Croatia have a checkered past after a Croatian court found Henadi guilty of bribing ex-Croatian Prime Minister Ivo Sanader in 2008. His charge was later cleared by the International Centre for Settlement of Investment Disputes (ICSID), a Washington DC-based court of arbitration.
Nevertheless, Mol is open to expanding operations with Croatian oil transit company Janaf. Both companies tested Adria’s transport capacity in February 2023. They concluded that the pipeline could cover all of Hungary and Slovakia with a capacity of 1.2 million metric tons of crude per month, according to Janaf.
But Budapest continues to turn its nose up at Croatia. On Aug. 2, Szijjarto accused Janaf of raising transit fees far higher than the market average and prohibiting long-term transport capacities with Mol.
Janaf fired back at both claims, saying the company is ready to accommodate Hungary and Slovakia. Fees are calculated by distance, the level of capacity utilization for the specific pipeline section, and the negotiation process, Janaf said in a press statement.
“We are convinced that the price of transportation is not a factor in the matter,” the company said.
Mol signed a one-year contract with Janaf in 2023 for 2.9 million metric tons of crude to Hungarian and Slovak refineries. But Hernadi is also keen to keep the Druzhba pipeline flowing, saying it's better to have two supply routes rather than one.
Hungary has pledged to provide detailed explanations to the EC on why it will not fully switch to the Adria pipeline or other options, an EC spokesperson told the Kyiv Independent.
“The objective of diversification away from Russian fossil fuels should be actively pursued,” the EC said.
Nate Ostiller
